Transcription of Milton Friedman on Inflation
1 EconomicSYNOPSES short essays and reports on the economic issues of the day2007 Number 1 The death of Milton Friedman on November 16, 2006,led Federal Reserve Chairman Ben Bernanke toremark that the direct and indirect influences ofhis thinking on contemporary monetary economics wouldbe difficult to overstate and President Bush to note that his writings laid the groundwork that transformed manyof the world s central banks. Undoubtedly a major factorunderpinning these assessments is the overwhelminginfluence that Friedman s work has had on the way thateconomists and policymakers look at Friedman emphasized, Inflation is an old, old ve had thousands of years of experience of it. There isnothing simpler than stopping an Inflation from thetechnical point of view.
2 1 That remedy took a specific form: The only cure forinflation is to reduce the rate at which total spending isgrowing. This cure involved a temporary side effect, asFriedman noted: There is no way of slowing down inflationthat will not involve a transitory increase in unemployment,and a transitory reduction in the rate of growth of these costs will be far less than the costs that will beincurred by permitting the disease of Inflation to rageunchecked. On the issue of how economic policy should managetotal spending, Friedman led the profession away from theweight it gave to fiscal policy. His work was important informing the consensus that monetary actions have moresizable and reliable effects on aggregate spending than fiscalactions. In fact, Friedman offered the judgment, I don tthink monetary policy has to be backed up by fiscal policyat all.
3 I think monetary policy can curb Inflation . His rea-soning behind this was straightforward: A budget deficitis inflationary if, and only if, it is financed in considerablepart by printing money that is, only if fiscal actions areaccommodated by the monetary authorities. In light of theimportance of monetary policy for aggregate spendingbehavior, and of total spending for Inflation , Friedmanstated the policy implication: [M]onetary policy is anappropriate and proper tool [when] directed at achievingprice stability or a desired rate of price change. This prin-ciple underlies the monetary policy framework of majoreconomies was particularly scathing about cost-push theories, prevalent in the 1960s and 1970s, that attributedhigh Inflation to autonomous increases in costs rather thanto excess demand.
4 As he observed, To each businessmanseparately it looks as if he has to raise prices because costshave gone up. But then, we must ask, Why did his costs goup? Why is it that [for example] from 1960 to 1964 he didn tfind that he had to pay so much more for labor he had toraise prices, but that suddenly from 1964 to 1969 he did? The answer is, because, in the second period, total demandall over was increasing. Friedman s monetary view of theinflation process led him to dismiss incomes policy , direct controls on wages and prices as an alternativeor supplement to monetary policy in fighting in 1974, Do you think an incomes policy is anessential adjunct of a strict monetary policy? Friedmanreplied simply, Not at all. Consistent with this judgment,many countries that once assigned an important role toincomes policy now rely on monetary policy to in the 1970s saw that Inflation was costly,but failed to grasp that to get Inflation under control, theyneeded to use monetary policy, and onlyneeded to usemonetary policy.
5 The fact that today s policymakers dounderstand this reflects the profound impact of MiltonFriedman on monetary economics. 1A list of sources for the quotations from Friedman used here is available Friedman on InflationEdward expressed do not necessarily reflect official positions of the Federal Reserve System.
